<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-11671
POCAHONTAS BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 55-0628089
------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Federal Street, Bluefield, WV 24701
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 325-8181
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
The number of shares outstanding of the registrant's $1.25 par value common
stock, as of August 11, 1998, was 2,000,000 shares.
1
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Financial Statements
Consolidated Statements of Financial Condition.............. 3
Consolidated Statements of Income........................... 4
Consolidated Statements of Cash Flows....................... 5
Consolidated Statements of Changes in Stockholders' Equity.. 6
Notes to Consolidated Financial Statements.................... 6 - 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7 - 8
PART II. OTHER INFORMATION
Submission of Matters to a Vote of Security Holders........... 9
Other Information............................................. 9
Exhibits and Reports on Form 8-K.............................. 10
SIGNATURES.................................................... 10
The total number of pages of the Form 10-Q Quarterly Report is ten (10) pages.
2
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) June 30, December 31,
1998 1997
ASSETS (Unaudited) (Audited)
--------------- -----------------
<S> <C> <C>
Cash and due from banks $ 10,620 $ 8,883
Interest-bearing balances with banks 10,497 2,013
Securities available for sale: (cost approximated $41,817 at
June 30, 1998, and $36,024 at December 31, 1997) 42,004 36,177
Securities held to maturity: (market value approximated $13,190 at
June 30, 1998 and $17,516 at December 31, 1997) 13,000 17,334
Federal funds sold 10,000 3,400
Loans 205,605 197,094
Less allowance for loan losses 2,520 2,370
------------- -------------
Net loans 203,085 194,724
Premises and equipment 9,225 8,660
Real estate owned other than bank premises 702 993
Other assets 4,546 4,213
Goodwill and other intangible assets 1,824 350
------------- -------------
TOTAL ASSETS $ 305,503 $ 276,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 31,448 $ 27,923
Interest-bearing 222,714 204,414
------------- -------------
Total deposits 254,162 232,337
Federal funds purchased and securities sold under
agreements to repurchase 18,148 12,838
Demand notes to U. S. Treasury and other
liabilities for borrowed money 4,010 4,200
Other liabilities 1,578 783
------------- -------------
TOTAL LIABILITIES 277,898 250,158
------------- -------------
STOCKHOLDERS' EQUITY
Common stock - par value per share $1.25
Shares authorized: 10,000,000
Shares issued and outstanding: 2,000,000 2,500 2,500
Paid-in capital 785 785
Retained earnings 24,212 23,223
Accumulated other comprehensive income 108 81
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 27,605 26,589
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 305,503 $ 276,747
============= =============
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands, except per share data)
INTEREST INCOME 1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Interest and fees on loans $4,770 $4,346 $9,333 $8,516
Interest on balances with banks 45 16 62 41
Interest and dividends from securities available for sale:
Taxable 645 562 1,225 1,034
Interest and dividends from securities held to maturity:
Taxable 97 357 238 811
Tax-exempt 82 104 159 205
Interest on federal funds sold 127 57 170 104
------ ------ ------- -------
TOTAL INTEREST INCOME 5,766 5,442 11,187 10,711
INTEREST EXPENSE
Interest on time certificates of $100,000 or 321 270 601 562
more
Interest on other deposits 2,034 1,857 3,891 3,823
Interest on federal funds purchased and
securities sold under agreements to repurchase 146 131 288 252
Interest on demand notes to U. S. Treasury
and other liabilities for borrowed money 17 23 39 39
------ ------ ------- -------
TOTAL INTEREST EXPENSE 2,518 2,281 4,819 4,676
------ ------ ------- -------
Net interest income 3,248 3,161 6,368 6,035
Provision for loan losses 133 238 321 379
------ ------ ------- -------
Net interest income after provision for loan losses 3,115 2,923 6,047 5,656
NONINTEREST INCOME
Income from fiduciary activities 330 280 510 460
Other operating income 374 369 709 678
Gains (losses) on sale of securities -- (59) (14) (59)
------ ------ ------- -------
TOTAL NONINTEREST INCOME 704 590 1,205 1,079
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 1,181 1,103 2,320 2,206
Premises and equipment expense 326 298 629 599
Other noninterest expense 958 850 1,819 1,766
------ ------ ------- -------
TOTAL NONINTEREST EXPENSE 2,465 2,251 4,768 4,571
------ ------ ------- -------
Income before income taxes 1,354 1,262 2,484 2,164
Provision for income taxes 490 463 895 760
------ ------ ------- -------
NET INCOME $ 864 $ 799 $ 1,589 $ 1,404
====== ======= ======== ========
NET INCOME PER COMMON SHARE $ 0.43 $ 0.40 $ 0.79 $ 0.70
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended
June 30,
----------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
------- --------
<S> <C> <C>
Net income $ 1,589 $ 1,404
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 321 379
Depreciation and amortization 354 310
Securities losses 14 59
Net investment amortization and accretion 63 143
(Increase) decrease in interest receivable and other assets (341) 587
Increase in interest payable and other liabilities 616 386
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,678 3,268
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (6,600) 1,850
Purchases of securities held to maturity (1,430) (325)
Purchases of securities available for sale (10,003) (11,057)
Proceeds from maturities and calls of securities held to
maturity 5,739 13,157
Proceeds from maturities and calls of securities available for
sale 3,274 --
Proceeds from sales of securities available for sale 883 1,751
Net increase in loans (5,272) (3,581)
Net cash received from branch acquisition 8,510 --
Acquisition of fixed assets (638) (893)
------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,537) 902
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 6,896 740
Net increase (decrease) in time deposits 1,664 (4,726)
Net increase (decrease) in short-term borrowings 5,120 (1,685)
Cash dividends paid (600) (600)
------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,080 (6,271)
------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $10,221 $ (2,101)
CASH AND DUE FROM BANKS AT JANUARY 1, 10,896 14,403
------- --------
CASH AND DUE FROM BANKS AT JUNE 30, $21,117 $ 12,302
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,508 $ 4,473
Income taxes 929 414
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Unaudited) Six Months Ended
June 30,
--------
(Dollars in thousands)
1998 1997
---------- ----------
<S> <C> <C>
BALANCE, JANUARY 1, $ 26,589 $ 24,629
Net income 1,589 1,404
Cash dividends declared - $0.30 per share in 1998 and 1997 600 600
Other comprehensive income 27 69
--------- ----------
BALANCE, JUNE 30, $ 27,018 $ 25,502
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Rule S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All such adjustments were of a
normal recurring nature. Certain reclassifications have been made to the prior
period's financial statements to place them on a comparable basis with the
current period's financial statements. Operating results are for the six-month
period ended June 30, 1998, and are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information refer to the financial statements and footnotes thereto included as
Exhibit 13 to Corporation's annual report on Form 10-K for the year ended
December 31, 1997.
NOTE B - EARNINGS PER SHARE
Earnings per common share are computed on the weighted average number of shares
of common stock outstanding during the period. As of June 30, 1998, there were
no stock options or other capital items that would dilute the Corporation's
earnings per share.
NOTE C - COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. As required by SFAS No. 130,
prior year information has been modified to conform with the new presentation.
Comprehensive income includes net income and all other changes to the
Corporation's equity, with the exception of transactions with shareholders
("other comprehensive income"). The Corporation's only component of other
comprehensive income is the change in unrealized gains and losses on available
for sale securities.
The Corporation's total comprehensive income for the six-month periods ended
June 30, 1998 and 1997 was $1,616,000 and $1,473,000, respectively. Information
concerning the Corporation's other comprehensive income for the six-month
periods ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Unrealized gains on available for sale securities $ 34 $ 81
Income tax liability relating to
unrealized gains on available for sale securities (7) (12)
----- -----
Other comprehensive income (loss) $ 27 $ 69
===== =====
</TABLE>
6
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1998
NOTE D - ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Corporation has determined that FAS 133 will
have no effect on the Corporation's results of operations or its financial
position as the Corporation does not engage in these types of activities.
NOTE E - REGULATORY CAPITAL REQUIREMENTS
Regulators of the Corporation and its subsidiaries have implemented risk-based
capital guidelines which require the maintenance of certain minimum capital as a
percent of assets and certain off-balance sheet items adjusted for predefined
credit risk factors. The regulatory minimums as defined by regulation for Tier
1 and combined Tier 1 and Tier 2 capital ratios were 4.0% and 8.0% respectively.
Tier 1 capital includes tangible common shareholders' equity reduced by goodwill
and certain other intangibles. Tier 2 capital includes portions of the
allowance for loan losses, not to exceed Tier 1 capital. In addition to the
risk-based guidelines, a minimum leverage ratio (Tier 1 capital as a percentage
of average total consolidated assets) of 4% is required. The following table
contains the capital ratios for the Corporation and each subsidiary as of June
30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- ------------------------------
Combined Capital Combined Capital
Entity Tier 1 (Tier 1 and Tier 2) Leverage Tier 1 (Tier 1 and Tier 2) Leverage
<S> <C> <C> <C> <C> <C> <C>
Consolidated.............. 11.99% 13.16% 8.88% 13.17% 14.37% 9.12%
First Century Bank, N.A... 11.62% 12.79% 8.43% 12.91% 14.11% 8.92%
First Century Bank........ 12.22% 13.42% 9.36% 12.45% 13.68% 8.75%
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the second quarter of 1998 net income increased $65,000 or 8.1% from the
$799,000 earned during the second three months of 1997, to $864,000 earned
during the same period in 1998. This improvement was primarily the result of
increases in the interest margin of $87,000, or 2.8%, and in noninterest income
of $114,000, or 19.3%. The increase in noninterest income was attributable to
an increase in trust fees of approximately $50,000. Also, approximately $59,000
in losses on securities for the second quarter of 1997 were not incurred in
1998. Additionally, the provision for loan losses decreased $105,000, or 44.1%,
all attributed to a reduction in net charge-offs for the quarter. These
improvements were offset by an increase in noninterest expenses of $214,000.
Earnings per share for the second quarter of 1998 were $0.43 compared to $0.40
per share for the second quarter of 1997. When compared to the first quarter of
1998, net income increased $139,000, from $725,000 for the quarter ended March
31, 1998, to $864,000 for the quarter ended June 30, 1998. This was
attributable to increases in the interest margin of $128,000, and in noninterest
income of $203,000, along with a reduction in the provision for loan losses of
$55,000 which helped offset an increase in noninterest expenses of $162,000 when
compared with the first quarter of 1998. Earnings per share increased $0.07 per
share from $0.36 per share for the quarter ended March 31, 1998, to $0.43 per
share for the quarter ended June 30, 1998.
7
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The improved performance during the second quarter enhanced the earnings for the
six-month period ended June 30, 1998. Net income was $1,589,000 for the first
six months of 1998 which was an increase of $185,000, or 13.2%, over the 1997
level of $1,404,000. Increases in the interest margin of $333,000, or 5.5%,
attributable to increased loan volume, contributed to the improved earnings.
Also, noninterest income increased $126,000, or 11.7%. Trust fees were a
contributing factor in improved noninterest income, reflecting growth in and
enhanced pricing for fiduciary activities. Noninterest expenses increased
$197,000, or 4.3%, to $4,768,000 for the six months ended June 30, 1998, from
$4,571,000 for the same period in 1997.
Earnings per share for the six-month period ended June 30, 1998 were $0.79
compared to $0.70 per share for 1997. The Corporation's performance through
June 30, 1998 reflects an annualized return on average assets of 1.11% and a
return on average equity of 11.70%.
Total assets increased approximately $28.8 million from December 31, 1997 to
June 30, 1998. Approximately $15 million of this growth was the result of the
completion of an acquisition of the Bluefield, Virginia branch of First American
Federal Savings Bank, Roanoke, Virginia, during the second quarter of 1998.
Additionally, approximately $10 million was attributable to short-term deposits
and repurchase agreements at June 30, 1998, resulting from seasonal fluctuations
by some of the Corporation's larger customers. Total assets at June 30, 1998
were $305.5 million as compared to $276.7 million at December 31, 1997. The
loan portfolio continued to grow during this six-month period, increasing to
$205.6 million or an increase of $8.5 million or 4.3%. The investment portfolio
remained essentially unchanged during the first six months of 1998. As
previously discussed, total deposits increased approximately $21.8 million
during the first half of 1998, with most of this increase occurring in the
interest-bearing category.
The Year 2000 (Y2K) problem continues to be a major focus of the financial
services industry. The Corporation has been working diligently on this problem
for many months. Internal reviews of all software and hardware have now been
completed. Internal test and contingency plans have been developed for all
mission critical applications and actual testing on these systems should be
completed by December 31, 1998. Externally, the Corporation is also continuing
its undertaking to inform and assist key customers in their Y2K compliance
efforts.
8
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on April 21, 1998. Total
outstanding shares were 2,000,000 at April 21, 1998. Matters brought before the
stockholders and the voting results are as follows:
(1) To elect fifteen (14) nominees for director to serve for a term of one
year.
<TABLE>
<CAPTION>
Nominee Shares For Shares Against Abstentions
- ------- ---------- -------------- -----------
<S> <C> <C> <C>
Paul Cole, Jr. 1,553,003 1,548 5,460
Eustace Frederick 1,551,803 2,748 5,460
B. L. Jackson, Jr. 1,554,547 4 5,460
Robert M. Jones, Jr., M.D. 1,548,803 5,748 5,460
Harold L. Miller 1,554,551 -- 5,460
Charles A. Peters 1,554,547 4 5,460
C. E. Richner 1,554,547 4 5,460
Byron K. Satterfield 1,554,547 4 5,460
John C. Shott 1,552,281 2,270 5,460
Scott H. Shott 1,549,333 5,218 5,460
Walter L. Sowers 1,554,551 -- 5,460
J. Brookins Taylor, M.D. 1,554,551 -- 5,460
Frank W. Wilkinson 1,554,547 4 5,460
R. W. Wilkinson 1,554,547 4 5,460
</TABLE>
(2) To ratify the selection of Coopers & Lybrand, Certified Public Accountants,
to serve as independent auditors for the registrant for the year ending
December 31, 1998. Shares for: 1,696,442; Shares against: 400;
Abstentions: 3,000.
(3) To approve the 1998 Director Stock Option Plan. Shares for: 1,464,563;
Shares against: 95,468; Abstentions: 31,060.
(4) To approve the 1998 Officer Stock Option Plan. Shares for: 1,469,007;
Shares against: 100,876; Abstentions: 21,208.
The text for the matters listed in this Item 4 is set forth in the definitive
proxy solicitation materials which were filed with the Commission on or about
March 30, 1998, and are incorporated herein by reference.
Item 5 - Other Information
On July 31, 1998, the Corporation's board of directors unanimously approved an
agreement in principle to acquire First National Bankshares Corporation, the
parent company of First National Bank, which has offices in Ronceverte,
Lewisburg and Charleston, West Virginia. The board of directors of First
National has also unanimously approved this agreement. The transaction,
currently set forth in a non-binding letter of intent, will be structured as a
tax-free stock exchange to give First National shareholders approximately 3.6
shares of common stock of the Corporation for each share of First National
common stock. First National Bank will be merged into the Corporation's lead
affiliate, First Century Bank, N.A., and its offices will thereafter operate as
branches of First Century under the First Century name. The transaction is
subject to, among other conditions, the negotiation and execution of a
definitive and legally binding merger agreement, approval of the transaction by
shareholders and various regulatory authorities, completion by both companies of
satisfactory due diligence reviews of the other organization, and other
conditions standard to transactions of this type.
9
<PAGE>
POCAHONTAS BANKSHARES CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION (Continued)
Item 6 - Exhibits and Reports on Form 8-K.
(a.) Exhibit 27 - Financial Data Schedule
(b.) None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Pocahontas Bankshares Corporation
---------------------------------
By: /s/ J. Ronald Hypes
-------------------------
J. Ronald Hypes, Treasurer
(Principal Accounting and Financial Officer)
Date: August 12, 1998
-------------------------
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,620
<INT-BEARING-DEPOSITS> 10,497
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,004
<INVESTMENTS-CARRYING> 13,000
<INVESTMENTS-MARKET> 13,190
<LOANS> 205,605
<ALLOWANCE> 2,520
<TOTAL-ASSETS> 305,503
<DEPOSITS> 254,162
<SHORT-TERM> 22,158
<LIABILITIES-OTHER> 1,578
<LONG-TERM> 0
0
0
<COMMON> 2,500
<OTHER-SE> 25,105
<TOTAL-LIABILITIES-AND-EQUITY> 305,503
<INTEREST-LOAN> 9,333
<INTEREST-INVEST> 1,622
<INTEREST-OTHER> 232
<INTEREST-TOTAL> 11,187
<INTEREST-DEPOSIT> 4,492
<INTEREST-EXPENSE> 4,819
<INTEREST-INCOME-NET> 6,368
<LOAN-LOSSES> 321
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 4,768
<INCOME-PRETAX> 2,484
<INCOME-PRE-EXTRAORDINARY> 1,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,589
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 0.00
<LOANS-NON> 1,711
<LOANS-PAST> 134
<LOANS-TROUBLED> 640
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,370
<CHARGE-OFFS> 214
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 2,520
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
